(Article Written By Colin Porter, Managing Director, Business Dynamics)
End of Financial Year, it’s that time of the year that can deliver certain business owners some truly big headaches. Hitting those books often highlights the sore points that have previously gone ignored or unnoticed, and it’s all the more frustrating with the knowledge that it didn’t have to be that way.
Cash flow problems often go by without a spotlight until it’s often too late, driving small businesses off the cliff as if someone’s pressed that accelerator down with purpose. I’ve said it before and we’ve all heard it before: don’t get caught out. Ensure you’re on top of every element that makes your business move. Here are 5 basic points I think can help avoid and deal with a sudden cash flow crash.
- Keep an eye on customers and businesses. I see it all the time, businesses that are suddenly hit hard when that all-important customer suddenly can’t pay up. Same thing goes with businesses getting in bed with others without conducting due diligence. Ensure those invoices are coming in with tight deadlines, and follow them up as soon as that date passes by. Consider every delayed payment to be a potential sign of trouble – even if it doesn’t necessarily turn out that way. Monitor the companies you are dealing with in order to determine risk. It’s a no-brainer.
- Spread out your spending. It’s a strange thing, but many small businesses decide to pay their clients, bills and services all around the same period, whether that be monthly, bi-monthly, quarterly, etc. Sure, that may prove to save you time and create some sort of rhythm in your outflow, but it’s a practice that often leads to a dangerous level of risk. A big amount of finance is lined up to be released, with an expectation that upcoming revenue will offset what’s gone out. Before you know it, cheques are bouncing and partnerships are at risk. Spread out the output – just in case.
- Watch those books. It’s easy to just focus on the day-to-day workings of the business, hitting out those office hours to keep business momentum up. Unfortunately, it’s this amount of hard work that often leaves the nitty-gritty details unseen. Line up a day or two, say once every month, to sit down with the necessary individuals and go through the numbers. Are you hitting those forecasts? Have you spent more than expected this quarter? Who hasn’t paid you yet? Get your accountant, get that fine-tooth comb, and work it out as often as you can.
- Ensure you have terms in place for every transaction and business relationship. It’s all about covering yourself and your business. Every transaction and trading move should have trading terms that need to be agreed upon. It obviously depends on your type of business, but a customer or business needs to be aware that they could be liable for legal costs and collection costs if they don’t pay for a service. Too often businesses struggle to make their rights clear when chasing down payments simply because there’s an absence of stipulation. If it comes down to it, you need to be able to easily prove that they knew what would happen if they didn’t pay.
- Have a Plan B. Let’s face it, the worst could still happen. While there’s no doubting just how much stress and financial strain any sort of business failure can bring, it’s important to have a backup plan in place for the possibility of that worst-case scenario occurring. Keep that relationship with your bank healthy and make sure you constantly pay back that credit; if it comes to the worst, you may be needing an emergency loan. Have that working capital financed in a way that offers the best of chance of survival. Align as many possible resources as possible, today, while you’re in the position to do so. Sit down with your business advisor or planner and plan for that rainy day. If you don’t, well, as they say, when it rains it pours.